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Alerts:

FEMA Update: Foreign Exchange Management (Cross Border Merger) Regulations, 2018

27 March 2018

In the backdrop of draft guidelines on Foreign Exchange Management (Cross Border Merger) Regulations, 2017 issued by Reserve Bank of India (“RBI”) on April 26, 2017, RBI vide notification No. FEMA 389/2018-RB dated March 20, 2018 has notified Foreign Exchange Management (“Cross Border Merger”) Regulations, 2018 (“RBI Cross Border Merger Regulations”). Please click here to see our earlier Alert on the subject.

Key features of the RBI Cross Border Merger Regulations are as under:

Particulars

Inbound Merger

Outbound Merger

Mechanics

A merger or amalgamation of foreign company with an Indian company

A merger or amalgamation of Indian company with a foreign company

Issue / Acquisition of securities pursuant to cross-border merger

Issuance/ transfer of shares to person resident outside India should comply with the pricing guidelines, entry routes, sectoral caps, attendant conditions and reporting requirements as laid down in Foreign Exchange Management (Transfer and issue of Security by a person Resident outside India) Regulations, 2017

However, if the foreign company is joint venture (“JV”)/ wholly owned subsidiary (“WOS”) of Indian company then conditions prescribed under Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 shall need to be complied by Indian company.

Further, in case the merger of the JV/ WOS results into acquisition of step down subsidiary of JV/ WOS of the Indian party, then Regulation 6 and 7 of Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 shall need to be complied with

A person resident in India may acquire or hold securities of the foreign Company pursuant to the outbound merger in accordance with current regulations pertaining to investment in Joint Venture / Wholly Owned Subsidiary abroad or the Liberalized Remittance Scheme (“LRS”), as applicable

 

Office outside/ in India

An office outside India of the foreign company, pursuant to the sanction of the Scheme shall be deemed to be the branch/office outside India of the resultant Indian company in accordance with Foreign Exchange Management (Foreign Currency Account by a person resident in India), Regulations, 2015. Accordingly, the resultant Indian company may undertake any transaction as permitted to a branch/ office under the aforesaid Regulations

An office in India of the Indian company, pursuant to sanction of the Scheme of cross border merger, may be deemed to be a branch office in India of the foreign company in accordance with the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business), Regulations, 2016. Accordingly, the foreign company may undertake any transaction as permitted to a branch office under the aforesaid Regulations

Conditionalities on Borrowings

Any borrowing or guarantees of the foreign Company from overseas source which becomes the borrowing of the Indian company pursuant to inbound merger shall conform with the External Commercial Borrowing norms or Trade Credit norms or other foreign borrowings norms within a period of two years

In the initial two years, the Indian company will not be able to make remittance for repayment of the foreign liability

Further, end use restrictions for such borrowings shall not apply

Foreign Company shall be liable to repay outstanding borrowings or guarantees as per the Scheme sanctioned by National Company Law Tribunal (“NCLT”) in terms of the Companies (Compromise, Arrangement or Amalgamation) Rules, 2016 pursuant to the outbound merger.

However, the resultant foreign company shall not acquire liability payable to lender in India if the same is not in conformity with Foreign Exchange Management Act, 1999 (“Act”), rules or regulations framed by the RBI

Further, no-objection certificate to this effect shall need to be obtained from the lenders in India of the Indian company

Acquisition / Holding of assets or securities

An Indian company may acquire and hold any assets/securities outside India pursuant to the inbound merger, which an Indian Company is permitted to acquire under the current provisions of the Act, rules or regulations framed by the RBI

Foreign Company may acquire and hold any assets/securities in India pursuant to the outbound merger which Foreign Company is permitted to acquire under the provisions of the Act, rules or regulations framed by the RBI 

Transfer of assets / securities not permitted to be acquired / held

In a situation where an Indian company is not permitted to acquire or hold any assets/securities outside India which is forming part of the foreign Company under inbound merger, such assets/securities need be transferred by the Indian company within a period of two years from the date of sanction of the Scheme and sale proceeds shall be repatriated to India immediately through banking channels;

Any liabilities not permitted to be held by the Indian company, the same may be extinguished from the sale proceeds of such overseas assets within a period of two years

In a situation where foreign company is not permitted to acquire or hold any assets/securities in India which is forming part of an Indian Company under outbound merger, such assets/securities can be transferred by the foreign company within a period of two years from the date of sanction of the Scheme and sale proceeds shall be repatriated outside India immediately through banking channels;

Repayment of Indian liabilities from sale proceeds of such assets/securities within a period of two years shall be permissible

Bank accounts

Pursuant to the Scheme of inbound merger, the resultant Indian company may open a bank account overseas, in foreign currency for a maximum period of two years from the date of sanction of Scheme

Pursuant to the scheme of outbound merger, the resultant foreign company may open Special Non-resident Rupee (“SNRR”) account in India in accordance with Foreign Exchange Management (Deposits) Regulations, 2016 for a maximum period of two years from the date of sanction of Scheme

 

Valuation of Companies involved in cross border merger

  • The valuation of the Indian Company and the Foreign Company for the purpose of cross border merger shall have to be in accordance with Rule 25A of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016

Miscellaneous

  • Compensation to the shareholders by the resultant Indian company or foreign company may be paid in accordance with the Scheme sanctioned by the NCLT;
  • All the non-compliance, contravention, violation of the Act or the Rules or the Regulations shall need to be completed prior to cross border merger

Reporting

  • The Indian Company and the foreign Company involved in the cross-border merger shall be required to furnish reports as may be prescribed by RBI, in consultation with Government of India, from time to time

Deemed Approval

  • All cross-border mergers undertaken in accordance with these regulations shall be deemed to be approved by RBI as required under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016. In the event, the above guidelines are complied with, no separate approval is required in the case of cross-border mergers/demergers/arrangements, from the RBI;
  • However, a certificate from Managing/ Whole Time Director and Company Secretary, if available, stating compliance with the RBI Cross Border Merger Regulations shall need to be furnished along with the application made to NCLT under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016